Can New NAFTA End Systematic Wage Repression in Mexico?

The entrenched system works to the detriment of the overall economy.

Chronic low salaries in Mexico have become a big bone of contention in the ongoing renegotiation of the North American Free Trade Agreement (NAFTA). In a talk at the University of Chicago last week, Canadian premier Justin Trudeau reiterated that if the labor standards of NAFTA were improved, companies would have fewer incentives to move factories to Mexico for cheap labor while Mexican workers would get a better deal. But that’s the last thing the Mexican government and global manufacturers with operations in Mexico seem to want.

Moody’s offered a bleak prognosis for Mexico’s low-cost regime. “Mexico has not attained the stellar growth rates that were anticipated from liberalizing its economy, and wage and productivity gaps with the US have widened rather than shrunk,” it said in a report last August. “NAFTA has not remedied Mexico’s low growth, low productivity and low wages,” it said:

If Mexico’s productivity continues to stagnate, the income gap with the US will widen over time, instead of converging. Mexico’s low productivity, low wages and low growth over the last three decades, even outside periods of economic crisis or recession, are not being remedied by the current export-focused growth model reliant on access to the US market through NAFTA. Mexico has maintained its comparative advantage through negative real wage growth, at the expense of income levels. As a result, instead of converging through trade, wage and productivity gaps with the US have widened.

Mexican assembly line workers only receive about one-eighth of what workers doing the same job north of the border earn. This is a feature, not a bug, of Mexico’s export-driven economy. Four years ago Jim Neil, the Goldman Sachs economist that first coined the BRICs term to describe Brazil, Russia, India and China, said that Mexico’s work force has the potential to turn Mexico into the “new China.” Since then wage growth in China has soared, leaving Mexico, as well as much of Latin America, in the dust.

Mexico’s system of wage repression has been working wonders for global automakers setting up shop in Mexico. For example, most of the workers at the Audi factory in the state of Puebla, inaugurated in 2016 and assembling the Audi Q4 SUV, which carries a sticker price in the US of over $40,000 for base versions, make $2.25 an hour — a tiny fraction of what a similarly qualified American or Canadian worker earn.

That nominal salaries in Mexico have stagnated in the wake of NAFTA should hardly come as a surprise. After all, NAFTA, like many other trade agreements that followed it, created a template for economic rules in which the lion’s share of the benefits would flow to capital while labor was lumbered with most of the costs. This was a feature, not a bug.

NAFTA granted corporations special protections against national labor laws that might threaten profits, set up special courts — presided over by pro-business experts — to judge corporate suits against governments, and at the same time effectively denied legal status to workers and unions to defend themselves in these new cross-border jurisdictions. Before any large global manufacturer sets up shop in Mexico, a “protection” contract is usually drawn up with the respective union to lock in low wages .

The problem for Mexican workers is not just that their salaries are so low; it’s that their already limited purchasing power is being further eroded by rising prices. In December 2017, the consumer price index increased 6.8% year-on-year, the sharpest since May 2001.

Average purchasing power slipped by 2.5% in 2017, according to Mexico’s National Council for the Evaluation of Social Development (CONEVAL), an independent government organization. During the same period the percentage of Mexico’s population that cannot afford even the basic daily food basket — just 92 pesos ($4.96) — rose from 39% to 41%.

According to another study, this time by the Institute for Industrial Development and Economic Growth, between 2012 and 2017 the number of people earning no more than the minimum wage — 88 pesos ($4.80) per day — increased by 15.5%. The number of workers receiving between three and five times the minimum wage dropped by 9.6% while the number earning more than five times the minimum wage plummeted 30.6%.

Clearly, conditions for many workers in Mexico are getting more, not less, precarious while internal demand continues to stagnate. Hence, much depends on whether the new NAFTA agreement that emerges from the current negotiations — assuming one actually does — finally puts an end to the rampant wage repression its predecessor helped institutionalize.

If that happens, Mexico’s political and business class are going to have to come up with a new national economic model that goes far beyond merely providing cheap labor to assemble products for the world’s biggest market, while at the same time ensuring that rising wages do not fuel inflation. That is not going to be an easy task, especially if the peso weakens. But if it works, the rise in internal demand might allow Mexico’s economy to finally begin growing at the sort of rates that proponents of the original NAFTA agreement forecast over two decades ago. By Don Quijones.

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37 comments for “Can New NAFTA End Systematic Wage Repression in Mexico?”

c smith

Feb 15, 2018 at 12:30 pm

Mexico can still provide “cheap” labor; it just doesn’t have to be held hostage to the “protection” rackets promulgated by TPTB in Mexico.

walter map

Feb 15, 2018 at 12:44 pm

“Can New NAFTA End Systematic Wage Repression in Mexico?”

Not likely. Under the present administration the goal is to make signatory countries competitive with Bangladesh. Mexicans should celebrate the good times while they can.

Look at the bright side: no more deportations.

mvojy

Feb 15, 2018 at 12:56 pm

NAFTA wasn’t designed to impose strict labor laws on other countries. It was crafted to increase corporate profits and keep the cost of goods down so Americans would continue to buy them. Employers in Mexico do not want to pay $15 an hour, plus health insurance, plus sick time, plus vacation, plus maternity leave and overtime as we often mandate in the U.S. If that were the case then manufacturers would have stayed here with their operations instead of moving them to Mexico.

c smith

Feb 15, 2018 at 2:28 pm

Long ways between $2.00/Hr and $15//Hr + bennies.

kam

Feb 16, 2018 at 11:20 am

In Trudeau’s Ontario, the Minimum wage is C$15.00

NAFTA sucks for Canada too.

Nicko2

Feb 15, 2018 at 2:12 pm

Stay tuned to who wins the next Mexican election…

WT Frogg

Feb 15, 2018 at 2:48 pm

That’s where my $ 25 / hr + Benefits job in the auto sector went back in 2006. 2000 jobs gone at just one plant alone.

Can’t compete with $24 / DAY.

Now instead of paying cash for those $ 50,000 + vehicles built in Mexico we get to buy them on the Never Never Plan over 7 years with cheap QE bucks.

What’s wrong with this picture ????? Sorry, but I’ll keep driving my paid for car until it dies. Then I will buy another 8 year old cream puff , rinse & repeat.
I love seeing the 3000+ new cars parked outdoors on various storage lots around here. They keep adding new lots all the time……….Crunch time maybe ??????

cdr

Feb 15, 2018 at 4:49 pm

Globalists would smile at the wage differential. They would think … the plan is working.

The use of credit to buy a new car is also on plan.

Used cars, however, are for college kids and the less fortunate. You need to step up and live up to their expectations. Otherwise, you are letting the system down.

Germany and Japan can. Their auto workers make a lot more than $25/hr, but then, their governments aren’t run by rapacious corporatists who have workers running in that race to the bottom.

The US, by comparison, has adopted the Haitian model. Given their voting patterns, Americans will likewise have to acquire a taste for dirt cookies.

There’s plenty for everybody, but naturally some people don’t like to share, people who look forward to the return of the cat-o-nine tails as an important feature of labor management, not to mention the repeal of the 13th amendment.

alex in san jose AKA digital Detroit

Feb 16, 2018 at 2:59 am

Germany and it might surprise many of you but Japan also, have strong Socialist movements.

2006 Average wage+benefit/hour (employees frequently make the mistake of not understanding or including the value of their benefits).:

o GM/Ford/Chrysler – $70-75/labor hour
o Honda/Toyota – $48/labor

Excluding Ford, with ineffective mangment & a cost structure like that, it pushed the domestic manufactures into bankruptcy. GM was basically given to the UAW to fund the pensions and Chrysler was sold for $1.

UAW membership was 1.9M in 1979 & about 400k in 2018 (over the years, UAW has expanded to non-automotive segments).

WT Frogg

Feb 16, 2018 at 12:03 pm

Tier 2 factory—– Dana Corp. We could always tell which new hires had worked for Ford or Generous Motors by the amount of whining they did. LOL

Ev Last

Feb 15, 2018 at 3:04 pm

If Mexican labor is 1/8 the cost of USA labor and Mexican future wages are locked in, then there is no incentive for productivity growth. NAFTA is neither “Free” nor fair. It was also never meant to be, just sold as if it were.

WES

Feb 15, 2018 at 6:47 pm

Hi Ev Last

While working in a third world country I naively asked a local worker why they didn’t work harder?

The reality is that these workers simply don’t have the money to eat high protein diets so they can work harder. If they do work harder then they are simply hungrier!

Javert Chip

Feb 15, 2018 at 6:59 pm

There is also the tiny matter of massively corrupt Mexican government & violent gangs.

John Freeman

Feb 15, 2018 at 4:06 pm

“After all, NAFTA, like many other trade agreements that followed it, created a template for economic rules in which the lion’s share of the benefits would flow to capital while labor was lumbered with most of the costs.”

I’m intrigued by this statement. Could anyone suggest some related reading?

Dave D'Rave

Feb 15, 2018 at 9:43 pm

Read about the USA-South Korea FTA, especially the part about “anyone who is a S. Korean citizen is allowed to move to the USA and work”.

This was not especially interesting per se (Koreans have dignity and will not work for half price), but is intended to establish a precedent.
Imagine the job market when the USA-Goatroapistan Free Trade Agreement allows all 800 million of them to move here. . .

Tony Mike

Feb 15, 2018 at 4:41 pm

Capitalism is neo slavery.

robt

Feb 15, 2018 at 8:52 pm

Venezuela awaits you.

alex in san jose AKA digital Detroit

Feb 16, 2018 at 3:56 am

Right on Tony Mike … our present form of capitalism is being described as neo-serfdom.

Javert Chip

Feb 15, 2018 at 7:01 pm

Spoken like someone with a dystopian outlook & absolutely zero experience with slavery.

walter map

Feb 15, 2018 at 9:38 pm

Um, Javert, given the current state of things, if you lack a dystopian outlook you’re really just not paying attention.

As to the latter, naturally we defer to your expertise for such, insofar as campaign managers with the highest possible political connections no longer seem to be available:

Everything is bad, the sky is gonna fall, nothing is salvageable, things are even more horrible than we know, the glass isn’t half empty (there isn’t a glass), the end of the world is right now, blah, blah. Kinda like a broken record.

I commented on ” Capitalism is neo slavery” and you just dove into a dark pool of something or other. I have zero interest in deciphering your off-topic stuff like “…naturally we defer to your expertise for such, insofar as campaign managers with the highest possible political connections no longer seem to be available..,”

Bin

Feb 15, 2018 at 9:46 pm

I guess Henry Ford’s idea of paying a wage good enough to purchase a vehicle doesn’t apply in Mexico.

Bin
Another reason Ford raised his raises was to keep good workers who were already trained . Before that he had to constantly train workers as many would go to a competitor if they could make even a slightly higher wage somewhere else . I bet that goes on quite A BIT IN Mexico .

walter map

Feb 15, 2018 at 10:45 pm

A pleasant Ford myth, long discredited. In fact Ford had to pay his workers well to keep them because his methods were abusive and his factories lethal. Importing thousands of desperately poor blacks from the South helped him very little for the same reasons, so he had to pay to keep his factories running. Strikers didn’t risk their lives over low pay. He was a famously vicious antisemite and supported German military imperialism, which was actually normal for tycoons of the time.

The “little man’s little man” once sued a newspaper for calling him an ignoramus and was awarded damages of six cents.

It’s true that Mexicans aren’t paid enough to buy the cars they produce, but then, people who picked cotton back in the day couldn’t afford to buy it either, and until the late 1860s weren’t legally humans at all. But at least Mexicans got paid and slaves got fed: there have been extreme cases where people by the thousands were simply worked until they died and stacked in the back by replacements shipped in by rail who suffered the same fate.

roddy6667

Feb 15, 2018 at 9:53 pm

this article ignores the simple fact that Mexican workers getting $2.50 an hour are not living in America and spending their paychecks there. What kind of lifestyle does $2.50 buy in Mexico? Is it a step up from what they were making before? Are Mexicans lining up to get jobs at these factories?
People who don’t know anything complain about “slave wages” in China undermining American workers. An auto worker there makes about $5.75 an hour US. This is a good job with job security, good working conditions, a pension, medical benefits, all that. The worker enjoys a solid middle class life defined by Western standards of consumer goods and lifestyle. The worker and his family go on vacations, dine out, have nice furniture, electronics, clothes, and save 36% of their pay. What kind of hourly wage that translate to in Detroit? It is not slave wages.
Mexico is cheaper than China now. Does anybody have numbers on what kind of life $2.50 an hour buys in the area where the factories are?

Read the part in the article about poverty. And weak consumer demand, due to low wages. Then you will realize that the article doesn’t “ignore” that these Mexicans live in Mexico.

Chinese autoworkers get paid multiples of what a Mexican autoworker gets paid.

roddy6667

Feb 16, 2018 at 3:32 am

Is it a step up from what they had before? In Bangladesh, garment workers toil in dreadful firetrap sweatshops for pennies. A lot of Americans think this is awful and should be banned. What they have now is far better than what they had just a few years ago. Progress doesn’t happen all at once, it happens in degrees. Ask the workers in Bangladesh if they want the factories closed and they return to starving as subsistence farmers. Ask the Mexicans what they want. Do they want the auto factories closed down because Americans don’t like it? I don’t think so.
The world is not black-and-white all-or-nothing.

Why don’t you try to understand the article? It describes a nationwide system of wage rigging in Mexico. Your choice (ludicrously low wages or shut down auto factories) is a false choice. See wages in China, which have been soaring, along with auto factories.

c smith

Feb 16, 2018 at 9:58 am

So who gets the majority of the blame here? Is it the people in Mexico running the protection rackets? Or is it the manufacturers? Why don’t the car makers demand a better deal for the workers?

JD

Feb 16, 2018 at 9:08 am

I don’t believe anything about what you wrote regarding standard of living for the average Chinese auto worker… it is not consistent with what I do know about worker compensation in China that ppl who have worked and lived there told me. Even the math doesn’t work to corroborate the lifestyle you claim they supposedly ‘enjoy’ … for a $15000 automobile @$5.75/hr (or ~$60 day) a Chinese worker will have save 250 days of compensation to buy what they build … in Henry Fords’ day he paid the ‘extraordinary’ pay of $5/day and vehicles (which were considered luxury items of the day) could be had for $800 so it took saving 160 days of compensation for a worker to buy what they build … so unless the cost of living in China wherever the plants are is less than what the cost of living for an American worker in Detroit in 1910 was …. what you claim is false on its face

wkevinw

Feb 16, 2018 at 9:00 am

Yes, this free trade religion is just that; a religion based on very thin gruel they teach early in undergrad economics classes. This is mixed with greed and some global social justice policies along with some anarcho-libertarians, and you get enough support to sign “free trade” agreements. The agreements aren’t free or fair on just casual observation. Any agreement with 2000 pages of regulation would seem to preclude much freedom.

The stuff in the economics textbooks implicitly does the same thing as most economic models- isolate the economic variables as if the trading partners are on a desert island- where they have similar economic and other socio/economic factors.

International trade between the rich and poorer/developing countries fails these assumptions-there are usually lower environmental, labor and social/welfare standards for one trading partner- so the workers in the agreements get very little benefit, especially in the richer countries.

There has been a trade war going for a long time. It’s just that only one or two groups have been fighting- the elite of the rich and poor countries. Everybody else is picking up economic crumbs.

JD

Feb 16, 2018 at 9:30 am

The rhetoric regarding the ‘merits’ of these so-called ‘free trade’ agreements have always been extremely thin and essentially illogical. I have yet, in 25 years, met anyone, or have even heard or read, that offered a logical , point by point , debate on the ‘merits’ of these trade agreements. The only dominate theme has been the “leveling the playing field” meme which HAS happened and continues to happen meaning owners of capital and the people at the top of the corporate ladder (3-5 % … ie: major stock option awards) make out like bandits in a bank robbery and everyone else is flattened and eventually destroyed economically. When one tries to take someone to task in debating the topic , one is met consistently with a. Ad hominem attacks or b. A repeat of all the same lame talking points we’ve heard for all these years as they cannot go off the script because it has no substance

Tony Mike

Feb 16, 2018 at 11:07 am

Oh, we paid them something (a mere peso), thus it is not slavery. I pulled the stats and the OECD and the UN show that the top 10% own 42% of all income; the bottom 10% own 1.3% of all income. 44% of the population lives in poverty. Second poorest country behind Brazil in Latin America with 80 million lesser people, with the 2nd largest economy. As much as I dislike wikpedia here is the link. https://en.wikipedia.org/wiki/Poverty_in_Mexico

The oligarchs are exploiting the poor, but that is what capitalism is all about in their race to the bottom. Woe, is the stock holder.

JD have you recently left your rarefied surrounding to travel the world and see what poverty looks like?

Robert Zawacki

Feb 17, 2018 at 3:48 pm

If I am to believe my taxi driver during a vacation near Cancun, driver wages amount to $4.00 per day, this includes use of the taxi companies vehicle, gas, and vehicle service. The days are long as competition is fierce, waiting time and perhaps bribes for better placement at pre-determined taxi stops,(my understanding is you can’t hail a taxi). Tips are the main source of income for drivers, tour guides and others.

Ian

Feb 18, 2018 at 5:39 am

An obvious point but bears stating. The NAFTA re-negotiation was instigated by Trump. While I am under no illusion he has the best interests of Mexican workers at heart, there has never been a peep from Mexico to do this as far as I know and please correct me. They were quite happy with the labour force deteriorating conditions.